Understanding the Identification Rules of a 1031 Exchange
Disclaimer: NAI Legacy is not a tax nor financial advisor. The following information is to be used for informational purposes only. You should consult your tax advisor, financial advisor and a attorney prior to making any investment decision. NAI Legacy believes the information to come from reliable sources, but makes no representation nor warranty of the following content.
One of the first and most important steps in completing a successful 1031 Exchange is properly Identifying your replacement property. Under the rules of a 1031 Exchange, an investor has 45-days from closing their relinquished property to Identify their replacement property. There are three identification options an investor must adhere to complete a 1031 Exchange.
1. The Three (3) Property Rule:
The Three (3) property rule permits an exchanger to identify up to 3 properties of any fair market value. An investor can then close on any number of the three properties.
The three-property rule is commonly used for investors targeting specific investment opportunities
2. The 200-Percent (200%) Rule:
The 200% rule permits an exchanger to identify as many properties as they like as long as the identified properties’ aggregate fair market value doesn’t exceed 200% of the relinquished property.
The 200% rule is commonly used when an investor is looking to exchange into a larger volume of replacement properties or into a DST investment with multiple underlying assets.
3. The 95-Percent (95%) Rule:
The 95% rule permits and investor to identify as many replacement properties as they would like, as long as the investor closes on 95% of the value identified. The 95% rule has a narrow margin of error, however can be a useful technique in the right scenarios.
This rule is also commonly referred to as the 95-Percent exception, as it can be used as a backup in the event an original Identification technique becomes no longer viable during the 45-day identification window.
Regardless of your situation, it’s important to consult tax advisors, attorneys, and qualified intermediaries to ensure you’re properly using the identification rules to avoid in mishaps.